German drugmaker Stada Arzneimittel AG’s biggest problem -- its insipid profitability -- is making it one of the most hotly coveted assets in a bidding war that’s driven the price to 3.61 billion euros ($3.87 billion).
Consortiums of private equity firms including Advent International Corp. and Permira, as well as Cinven Ltd. and Bain Capital, have made offers in recent weeks to acquire the company, according to people with knowledge of the matter. Stada, based in a sleepy spa town on the outskirts of Frankfurt, has even attracted attention from as far as China, with Shanghai Pharmaceuticals Holding Co. considering joining the mix with CVC Capital Partners, people have said, asking not to be identified as discussions are confidential.
The intensifying pursuit, which has already boosted Stada shares by about 70 percent in the past year, centers around the buyout firms’ conviction that they can slash its costs and boost earnings. The company’s three-year average operating profit margin of 11 percent is among the lowest for makers of cheap copycat drugs globally, according to data compiled by Bloomberg. Streamlining the manufacturing, breaking up the firm or firing some of its more than 10,000 employees are potential targets for the buyers.
“Obviously, there’s potential for improvement,” said Bernhard Weininger, a Frankfurt-based analyst with Independent Research GmbH. “That’s the main reason why Stada is of great interest for financial investors.”
The feeding frenzy is driven in part by private equity firms’ search for fresh targets as a cycle of buying and selling each others’ assets in so-called secondary buyouts dry up, executives at the SuperReturn International conference in Berlin said earlier this month. Many private equity firms have already sold their vintage assets, which are businesses that have been held for about five years and are ready to go on the block, while other companies in their portfolios aren’t yet ripe for an exit.
Stada’s international ambitions have also left it more vulnerable. An expansion into Serbia and Russia -- undertaken about a decade ago to spur growth -- has proven to be a millstone in the past three years. The Bad Vilbel-based company, which will report 2016 earnings next week, has said this for the first nine months of the year:
Its suitors may face other hurdles as well.
While the departure of Chief Executive Hartmut Retzlaff in June after more than 20 years at the helm helped stoke speculation about Stada being up for sale, Chairman Carl-Ferdinand Oetker in recent days has proved to be no pushover.
Oetker, who heads a committee on the supervisory board to oversee the bidding process, hit the brakes on deal negotiations this week by refusing to approve additional due diligence by the potential buyers. That’s because their bids don’t reflect the fundamental value of the company, Stada said in a statement late Thursday.
Stada shares dropped as much as 2.7 percent before trading down 0.8 percent to 56.39 euros as of 11:18 a.m. in Frankfurt.
Oetker is also driving management to cut costs and pushed for higher profit targets as he maneuvers for higher offers, people familiar with the matter said. The company boosted its 2019 forecast on Friday, predicting a margin on adjusted earnings before interest, taxes, depreciation and amortization of about 22 percent. A key measure of profit will reach as much as 590 million euros, the company said, up from an earlier forecast of 510 million euros.
The move could help drive up the takeover value -- or kill the buyout firms’ appetite by making a deal too rich.
Stada, whose name is derived from the terms standardization and apothecaries, was born at the end of the 19th century when German pharmacies collaborated to create medicines of a uniform quality that could be sold throughout their network. The company makes Ladival sunscreen and Grippostad, which it claims is the nation’s most-used cold medicine. Until 1993, only pharmacists could buy its shares.
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